In 2018, the then Secretary of State for Housing, Communities and Local Government, Sajid Javid announced a “crackdown on unfairly sold practices” that would include setting ground rents on new long leases to zero and working with The Law Commission to make the process of purchasing a freehold or extending a lease of a flat “much easier, faster and cheaper”.
Following the 2018 Consultation, further detail was provided by the Government in that the ban was to come into effect immediately upon legislation coming into force, as opposed to there being any transitional period.
Now the Leasehold Reform (Ground Rent) Act 2022 (LRGRA 2022) has received Royal assent, although it is not yet fully in force. When it is, the LRGRA 2022 will operate to limit the ground rent that can be charged under a new long residential lease to a peppercorn per annum so effectively zero as promised.
As ever the devil is in the detail.
What Leases does the LRGRA 2022 apply to?
LRGRA 2022 applies to a “regulated lease”. To be a regulated lease, the lease must be:
- a long lease of a single dwelling, i.e. one granted for more than 21 years; and
- granted for a premium; and
- after the relevant commencement date (unless pursuant to a contract made before that date); and
- which is not an “Excepted Lease”.
Where a variation is made to a lease that would constitute a deemed surrender and re-grant of the lease, such as varying the extent of the land demised, extending the term of the lease or altering the rent pattern, the new lease will become a regulated lease, regardless of whether a premium is paid. Landlords must act carefully when considering variations to leases as they may inadvertently be caught by the LRGRA 2022.
Excepted Leases are:
- Certain business leases – those granted for business purposes where the nature of that business purpose is such, that use of part of the premises as a dwelling significantly contributes to that and on or before the time the lease is granted, the parties give each other notice that they intend the lease to be used for business purposes. Regulations may be made as to the form and content of such notices. Business includes a trade, profession or employment that does not include a home business.
- Statutory lease extension of a house or flat – the latter of which will be granted with a peppercorn rent in any event.
- Community housing leases (as defined at Section 2(7) of the LRGRA 2022) and if it meets any further conditions specified and regulations made by the relevant authority.
- Home finance plan leases (as defined at Section 2(9) of the LRGRA 2022) and it meets any further conditions specified and regulations made by the Secretary of State.
Ground Rent
The LRGRA 2022 operates by prohibiting a landlord under a regulated lease from requiring the tenant to make payment of a prohibited rent and includes failure by a landlord to refund the prohibited rent to the tenant within 28 days of receipt.
The permitted rent is one peppercorn (i.e. zero) per annum for a regulated lease. Different rules apply in respect of shared ownership leases and replacement leases (i.e. those that replace pre-commencement leases).
For shared ownership leases the rent charged in respect of the tenant’s equity share in the property must be a peppercorn, however the amount payable in respect of the landlord’s equity share can be any rent. If the lease does not reserve separate rents for the tenant and landlord’s respective equity shares, then any rent reserved is treated as relating to the landlord’s equity share. Once a tenant fully staircases the lease to 100% then the landlord is prohibited from demanding rent over and above a peppercorn.
A replacement lease is one that:
- includes some or all of the premises that were let by the pre-commencement lease; and
- the replacement lease term starts before the pre-commencement lease falls in; and
- is a regulated lease i.e. a premium is paid.
This will be important when tenants who collectively own the freehold to the block containing their flats grant themselves extended leases.
For a replacement lease, the rent reserved by the pre-commencement lease can be replicated in the replacement lease provided the rent provisions fall away to become a peppercorn rent when the term of the pre-commencement lease would have expired. There are special rules regarding the replacement of shared ownership leases.
Sanctions For Non-Compliance
If a landlord demands a ground rent in breach of the LRGRA 2022 and/or any payment is not returned to the tenant within 28 days of receipt, Trading Standards Authorities have the power to impose fines of between £500 and £30,000 on the landlord.
Further, tenants have right to apply to the First-Tier Tribunal to recover prohibited rents that have been paid.
When will the LRGRA 2022 come into in force?
This will be done in phases.
Initially, those sections required to enable regulations to be made and those regarding interpretation and other general provisions came into force on 8 February 2022.
The main provisions, i.e. the ground rent restrictions, will come into force on a date to be specified by the Secretary of State in the regulations. These parts may be brought into effect on different days for different lease types.
For retirement home leases, the provisions will not take effect before 1 April 2023 to allow the retirement sector time to adjust.
Conclusion
Landlords will need to be careful to avoid inadvertently terminating their rental income stream by agreeing to a variation of a lease that would constitute a deemed surrender and regrant of the lease. Landlords will also find themselves exposed to the risk of enforcement action if they then seek to collect the prohibited ground rent.
Landlords and their tenants alike need to be mindful when extending flat leases voluntarily outside of the statutory procedure set out in the Leasehold Reform Housing and Urban Development Act 1993 and must carefully consider the provisions regarding replacement leases.
Further, the LRGRA 2022 may have unintended consequences for tenants wishing to obtain voluntary lease extensions. There will be little incentive for a landlord to grant a voluntary extension and so they may more often require tenants to go through the statutory process. This often takes longer and is more expensive for tenants. The reason for this is the LRGRA 2022 will prevent landlords from increasing the ground rent or lengthen the period for which it is payable by the tenant in the new extended lease. This will add to the existing disadvantages already faced by landlords when granting a voluntary lease extension, namely the risk of being left out of pocket for costs on abortive matters and certain landlords lose out on a tax benefit.
Some landlords may wish to explore the possibility of agreeing an enhanced rent in lieu of a premium.
Tenants who own collectively own the freehold to the building containing their flats still have options available to them to demand a ground rent as usually a premium will not be paid on the grant of a lease extension.